Vietnam’s medium-term outlook remains favorable, and its growth prospects may improve to 6.3 per cent from 2017-2018, according to the World Bank’s latest Taking Stock report released on December 5.

For 2016 alone, the World Bank estimated the economy would grow 6 per cent. The figure of 6.3 per cent for 2017-2018 is based on an expected pick-up in global activity, the World Bank report said.

The report showed that Vietnam’s growth slowed to 5.9 per cent during the first three quarters of the year mainly because of a severe drought that reduced agricultural output, cut down on oil production and slowed external demand.

Vietnam’s growth was accompanied by low inflation and widening current account surplus. Despite price hikes for health and education services, core inflation remains low and headline inflation is expected to stay below the official target of 5 per cent.

Mr. Ousmane Dione, World Bank Country Director for Vietnam, pointed out that Vietnam’s macroeconomic stability creates a favorable environment for policy makers to accelerate structural reforms, which is crucial as the country moves toward a more productivity-led growth model. “The adoption of the 2016-2020 economic restructuring plan by the National Assembly in November, for instance, would address some of the emerging obstacles to growth in the economy,” he said.

Vietnam’s fiscal deficit remains sizable and is approaching the statutory limit of 65 per cent of the gross domestic product, but the government has reinforced its commitment to achieving fiscal consolidation in the medium term.

Source: the World Bank's Taking Stock, December 2016.

The economy’s recent performance owes in part to rapid credit growth and an accommodative fiscal stance, which may support growth in the short term but amplify existing medium-term financial and fiscal risks.

In addition, easing monetary conditions and reducing credit growth can exacerbate existing macroeconomic and financial vulnerabilities. Several risks could adversely affect medium term prospects such as delayed implementation of structural and fiscal reforms, a further slowdown in the global economy, fragile global financial market conditions, and the prospect of rising interest rates in the US.

The FDI sector continued to be an engine for Vietnam’s trade performance. The FDI sector accounts for 70 per cent of Vietnam’s total exports and its non-oil export value has been growing by a staggering 25 per cent on average over the last decade. FDI enterprises also account for about 14 per cent of fiscal revenue.

Source: the World Bank's Taking Stock, December 2016.

In response to the question about the impact of newly elected US President Donald Trump’s announcement to withdraw from the Trans-Pacific Partnership (TPP), Mr. Sebastian Eckardt, Senior Economist at the World Bank Group, said that Vietnam’s economy would not be impacted much in the middle term. “Vietnam is still the country that benefits most from this agreement,” he affirmed.

The report also showed that Vietnamese agriculture now sits at a turning point. The sector now faces growing domestic competition from cities, industry, and services for labor, land and water. Rising labor costs are beginning to inhibit the sector’s ability to compete globally as a low cost producer of bulk undifferentiated commodities.

Going forward, Vietnam’s agricultural sector needs to generate “more from less.” That is, it must generate more economic value and farmer and consumer welfare, using less natural and human capital and less harmful intermediate inputs.

According to the report, the Vietnamese government has played a major role in agricultural development. But the government will need to lead less and at the same time facilitate more to transform Vietnam’s agriculture and agro-food system.

For example, the government can undertake less direct investment in agriculture while focusing more on facilitating a more active agricultural land market, supporting rural infrastructure, reducing the transaction costs of farmers and agro-enterprises, and revitalizing the country’s agricultural innovation system.